29 March 2018
All customers are not created equal…
Any typical Recency/Frequency/Spend analysis tells us that some customers are more valuable than others in terms of the sales given to a retailer or brand. Further, loyalty industry methodologies like the EMO Index and the Net Promoter Score indicate that those customers who are more emotionally engaged with, or who more strongly advocate for any retailer or brand tend to be more loyal to that entity.
Logically, it might follow that some customers might be more profitable than others, and conversely, some could be downright unprofitable. Knowing which is which is the all-important question in a popular relationship management concept called ‘Customer Profitability’.
A recent Google search returned more than 7 million references to Customer Profitability – how to segment, measure, and manage relationships with customers based on how much an individual contributes to the firm’s bottom line. An accountancy method even has developed around this concept: for example, understanding ‘Customer Lifetime Value’ and ‘Customer Value Management Cycle’ are seen as keys to business health by some firms.
But beware the siren song to consider individual customer or household profitability.
Customers’ gifts of choice – or not
Typically, customers have choices around at which retailer they spend their money, what brands they select, and how much they engage with a brand’s marketing. They decide to what degree they prefer one brand to another, and advocate at-will for their best (or worst) retail and brand experiences.
Customers do not, however, have a choice on how much margin they give to a retailer or brand.
So, how is it that customers can be responsible for their own profitability? Is the customer accountable to margin by choosing to respond to a particular set of value propositions offered on the retailer’s terms? Is the customer culpable if a value proposition is not itself profitable, or if it allows for choices by customers that vary in net profitability?
I don’t think so.
Doing what’s right for the business…and for customers
Every business – and most particularly a Customer First organization – must focus its decision-making energy on doing what’s right for its customers and its shareholders at the same time. For customers, it’s about which value propositions increase participation (reach), sales (uplift), or frequency (visits) and thereby incrementally grow the basket ‘one more item, one more time’. For shareholders, this means understanding which value propositions grow sales and margin and which don’t.
Customers expect a fair exchange of value for their money. Shoppers cannot be expected to understand the cost to the business of the value offered. It is not the customers’ fault if a loss leader is offered, or if a store coupon reduces the net margin, or if the mix of the products bought according to one level of affluence and lifestyle delivers a higher basket margin than that of another.
Wrong for customers, wrong for business
In my experience, credit card and financial services providers are the strongest advocates of a ‘Customer Profitability’ approach to relationship management. It’s little wonder in these quarters that annual industry churn of accounts is greater than 40%, or that the cost to acquire / switch each new customer account is in the hundreds of dollars as industry standard, or that business costs have spiralled upward now for decades. Of course, these increased costs are transferred to the customer via higher interest rates or hidden in higher exchange rates for the retailer (which in turn, drive up retail prices).
‘Good’ profitable customers maximize their credit limits and retain high balances owed, whilst ‘bad’ customers ‘revolve’ by regularly paying off their balances. Poaching to encourage switching is a hallmark industry tactic, using offers like ‘freeing balance transfers’, often punishing the customer with hidden charges and costs to serve so that profitability by customer might be optimized.
It’s my observation that a ‘Customer Profitability’ mindset sits at the heart of these customer-disrespectful and anti-loyalty practices. Simply, customers do not have the gift of choice or the ease to understand which factors drive individual profitability, particularly given the customary qualification requirements and fine print common to this industry.
A better language – Proposition Profitability v Customer Profitability
In a Customer First organization, measuring the profitability of its various value propositions should become a business imperative: without it there is no fact basis for managing the value exchange between the company and its customers.
In a respectful, Customer First approach to business growth, each value proposition delivers recognizable value to customers as well as recognizable margin to the retailer or brand. The better mindset and language is, therefore, around Program / Proposition / Offer profitability.
An emerging best practice in this area is an analysis of the relative cost of each proposition using a common cost metric vs. the customer impact (uplift).
Analyzing the relative cost of each customer or customer type is a misguided exercise, and is counterproductive to growing true loyalty. If anything, the data reveals more about the retailer’s bad habits than it does about ‘bad’ customers.
Implications for retail leaders
Think about the choices customers are given in the value propositions you offer; is the profitability of these offers in any way within the customers’ gifts of choice? Who makes the profit margin decision – you or the customer?
Mind your language, and coach your loyalty people away from segmentations based on ‘Customer Profitability’. Yes, there is a value in understanding ‘Customer Lifetime Value’ and ‘Customer Value Management Cycle’ – but only by using spending and preference metrics; profitability considerations do not belong in the equation, however.
Guide toward the best practice of measuring the relative cost of each proposition to customer impact, using a standard cost metric.
So, I repeat, customers do not have a choice on how much margin they give to a retailer or brand. Treating customers differently based on their ‘profitability’ is counter-productive to building loyalty and toward creating a healthy retail customer experience.
This is the fourth in a series of LinkedIn articles from David Ciancio, advocating the voice of the customer in the highly competitive food-retail industry.